In a new report, the European Law Institute (ELI) has advocated for a “light-touch” regulatory approach to litigation funding, warning that overly prescriptive rules could hinder access to justice. The report, Principles Governing the Third-Party Funding of Litigation, argues that regulation should focus on addressing clear issues or promoting best practices without stifling the beneficial role funders play in legal systems.
Co-authored by High Court judge Dame Sarah Cockerill, former head of London’s Commercial Court, and Professor Susanne Augenhofer of Innsbruck University and Yale Law School, the report provides a framework for international guidance on litigation funding. It has been developed over two years of research to balance the interests of claimants, defendants, and funders alike.
The Role of Litigation Funding
Litigation funding enables third-party financiers to support legal cases in exchange for a share of potential proceeds. This practice has been instrumental in promoting access to justice, particularly in class actions where numerous claimants face resourceful defendants. However, the ELI’s study emphasizes the importance of maintaining funders’ commercial viability. “It has to offer a return to funders, or it will not be offered,” the report explains, adding that rigorous due diligence by funders often acts as a safeguard against frivolous claims.
The report also highlights the potential negative consequences of excessive regulation. It warns that burdensome rules could drive funders out of certain jurisdictions, diminishing opportunities for claimants to seek legal redress. This concern aligns with a 2022 European Parliament call for an EU directive on third-party litigation funding, which has raised debates about striking the right balance between oversight and market freedom.
Practical Recommendations
The ELI’s report includes detailed principles aimed at ensuring the funding market benefits all parties. These recommendations cover areas such as:
- Transparency: Promoting openness towards courts and all stakeholders.
- Conflicts of Interest: Establishing mechanisms to manage potential biases.
- Funding Agreements: Outlining minimum content requirements for clarity and fairness.
- Special Contexts: Providing tailored guidance for consumer litigation, arbitration, and insolvency cases.
The report’s practical guidance has been well-received. Neil Purslow, chair of the International Legal Finance Association, endorsed the findings, emphasising the positive role of litigation funding in improving access to justice for European businesses and consumers.
Implications in the UK and Beyond
The report is also expected to influence ongoing regulatory discussions in England and Wales. Dame Sarah Cockerill is a member of the Civil Justice Council’s (CJC) working group, which is currently reviewing litigation funding amid calls for tighter regulation. The group’s interim findings, initially anticipated this summer, are expected soon, with a final report due next year.
The review is particularly significant in light of the UK Supreme Court’s 2023 PACCAR ruling, which deemed many funding agreements unenforceable by classifying them as damages-based agreements (DBAs). Although legislative efforts to address this ruling stalled before the last UK general election, funders have adapted with alternative agreements to comply with existing laws.
Additionally, the CJC is examining proposals for statutory caps on funders’ returns, enhanced case management, and clearer regulatory frameworks.
High-Profile Litigation Funded by Third Parties
The ELI’s recommendations coincide with the progression of a record-breaking class action in England’s High Court. Backed by litigation funding, this multi-billion-pound claim involves Goodhead’s case against BHP over the 2015 Brazilian tailings dam disaster. With hundreds of thousands of claimants, this case underscores the critical role of funding in facilitating large-scale litigation.
Looking Ahead
The ELI’s study provides a roadmap for regulators and stakeholders aiming to foster a fair and sustainable litigation funding ecosystem. While debates about the optimal level of regulation continue, the report’s nuanced approach offers practical insights to navigate this evolving field.
For more details, explore the ELI’s full report here. You can also stay updated on the CJC’s review and related developments in litigation funding here.